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For example, consider entering into a lease contract with BMW SUV X5. As usual, the duration of the lease is 3 years and the lessee is required to make equal install payments during the duration.

At the end of the third-year, the lessee can either buy the car from the dealer or simply return to the dealer in accordance to the condition stipulated in the lease contract.

Are almost all automobile contracts in this way, and would it be corret to coin the term "closed-end lease"?

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    Why would you want to have a "perpetual lease" (of, presumably, the same car) when you can simply "roll over" the lease at the end of three years (return the 3yr-old car and lease a brand new one). A "perpetual lease" would see you – 10/15 years down the road – still paying for a (relatively) clapped-out car instead of your 3rd/5th new car. – TripeHound Sep 12 at 8:43
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Your question proposes that there are three ways to lease a vehicle:

  • The customer can end the lease any time, with the idea that the term will be short
  • The customer leases the vehicle for a specific number of months with the option to purchase at the end of the contract.
  • There is a perpetual lease.

The typical one today is the one with a specific term.

The first one is similar to how a car rental operates, when somebody rents a vehicle for a long period of time. I have generally see this done when a company must rent a van or truck for a project that will last months. They would get killed by the daily or weekly rate, and the rental car company still makes a profit. The monthly rental is priced to expect to make a profit on the rental before the wear and tear on the vehicle make it undesirable to rent. I would imagine that the rate would be higher than the expected normal lease or loan amount, determined by the expected lifetime, and how many months they expect it to be rented during that lifetime.

The third one (perpetual lease) would require that a contract be signed that would require the customer to keep the car for a few years, then turn it in, and immediately drive away in the new vehicle for the next few years. The customer would be signing up for a extremely long contract where there would have to be provisions to switch models from a sports car as a twenty year old, to a mini-van when the kids arrive, to a convertible during their mid-life crisis, to a car only driven to church on Sundays. This would also have to have provisions for switching makes, and accounting for the changes in technology that moves luxuries to standard options and finally to required features. The contract would have to account for people wanting to terminate the contract early without being so draconian nobody would signup. For the customer it would be the automobile equivalent of the timeshare condo - A long term lease that everybody regrets signing.

These lease options are much more complex for the customer and the company. For the average customer the best deal remains buying a newish vehicle with either no loan or a short loan.

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Almost all leases are that way - that's what a lease is

However, not all vehicles are financed by lease. An alternative method of finance is a chattel mortgage which is an outright purchase upfront financed by a loan (with or without a balloon payment) with a mortgage over the vehicle (the "chattel").

  • Is there some reason one could not have an open ended or rolling lease whereby they can lease the vehicle as long as they wish for monthly payments? Much like one would lease a house. – Vality Sep 12 at 4:47
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    @Vality because unlike a house, a vehicle is a depreciating asset - it becomes less valuable over time. – Dale M Sep 12 at 4:59
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Automobile leases are typically fixed (closed end in your terms) by design because of the nature of automobiles - they depreciate. That is, they lose value predictably over time. A lease payment is based on the dealership doing math on how much depreciation they expect to occur in a given time frame, then applying a money factor (interest rate) to that amount of lost value, and dividing it into equal payments over the given time frame. In order to do this math, the dealer needs to know what the depreciation is, per unit of time.

But it's important to note that the depreciation for a car does not follow a straight line - that is, the depreciation in the first month is very different from the depreciation in the 30th month. Because of this, the dealer needs to fix the duration of the lease ahead of time, in order to draw a line in the sand in terms of fixing the depreciation they have to divide into monthly payments. With the fixed time frame, it doesn't matter if a given months' payment covers that specific months' depreciation, because the total depreciation is spread out over the total time frame.

If a dealer allowed for a lease to be open-ended (that is, terminated at any random time), they would have no way to calculate a monthly payment that would work out to the total depreciation over the (unknown) total life of the lease. If the payment was calculated based on 30 months of depreciation, but then you turned the vehicle in after 3 months, the three payments you made would not cover the 3 months of depreciation (because vehicle depreciate quickly at first). Conversely, if you calculated the lease for 30 months, but then turned it in after 40 months, you would have overpaid for those last 10 months.

Other types of assets that are leased (i.e. land) are typically not considered to depreciate. Or, the depreciation is handled via a different mechanism than the lease itself. Because of this, the lease payment can be essentially fixed on a month by month basis, without having to know the duration of the lease upfront.

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